(33 1)  Congress  \ 
1st  Session  I 


SENATE 


/  Document 
X  No.  171 


THE  INCOME  TAX 


OPINIONS 


OF 


HON.  JOHN  K.  SHIELDS 

OF  TENNESSEE 

HON.  CORDELL  HULL 

OF  TENNESSEE 

AND 

THURLOW  M.  GORDON 

SPECIAL  ASSISTANT  TO  THE 
ATTORNEY  GENERAL 


ON  THE  PROPOSED  INCOME-TAX  PROVISION  OF 
THE  PENDING  TARIFF  BILL 


PRESENTED  BY  MR.  WILLIAMS 

AUGUST  26,  1913. — Ordered  to  be  printed 


WASHINGTON 

1913 


LC 

Li_  . 
cO 


3  S  6  V" 

5  w  fe  \  (, 


THE  INCOME  TAX. 


Memorandum  Prepared  by  Representative  Hull,  of  Tennessee, 

August  5,  1913. 

The  amendment  proposed  by  Senator  Root  on  July  18,  1913,  is 
based  upon  the  theory  that  the  proposed  income-tax  law  can  not 
reach  for  taxation  any  income  accruing  prior  to  the  date  of  its  taking 
effect,  which  was  required  to  be  taxed  under  the  rule  of  apportion¬ 
ment  under  the  decision  in  the  Pollock  case,  even  though  such 
income  accrued  subsequent  to  the  ratification  and  promulgation  of  the 
income-tax  amendment  to  the  Constitution.  The  essence  of  this 
contention  is  that  within  the  meaning  of  the  proposed  tax  law  the 
tax  is  limited  to  the  particular  income  as  a  specific  fund  out  of  which 
the  tax  is  to  be  taken,  and  also  that  such  income  becomes  principal 
whenever  received,  and  that  principal,  therefore,  can  oniy  be  reached 
for  taxation  by  apportionment,  notwithstanding  the  effect  of  the 
recent  amendment  and  the  usual  method  of  levying  and  measuring 
income  taxes  by  the  rule  of  uniformity  as  embraced  in  the  proposed 
law  and  in  former  laws  and  practices  of  the  United  States  Govern¬ 
ment. 

Prior  to  the  Pollock  decision  Congress  had  exercised  the  broadest 
power  to  impose  the  tax  on  incomes  by  the  rule  of  uniformity,  from 
whatsoever  source  derived.  The  great  question  raised  in  the  Pollock 
case  did  not  go  to  the  power  of  Congress  to  impose  the  tax,  but  to  the 
question  of  whether  the  power  had  been  exercised  according  to  the 
method  prescribed  by  the  Constitution — that  is  to  say,  whether  a 
power  to  tax,  limited  only  by  one  exception  and  two  qualifications, 
was  being  used  according  to  the  restrictions  as  to  the  method  pre¬ 
scribed  for  its  exercise.  The  Pollock  decision  held  that  only  certain 
classes  of  incomes  were  excise  taxes  and  as  such  leviable  by  the  rule 
of  uniformity,  while  certain  other  classes,  viz,  rent  of  real  estate,  and 
incomes  derived  from  invested  personality,  were  of  such  a  nature  that 
tax  laid  upon  the  same  constituted  a  direct  tax,  and  which  must  fall 
"under  the  rule  of  apportionment.  Prior  to  this  decision  the  policy 
of  the  Government  and  the  decisions  of  the  courts  were  to  the  effect 
that  all  taxes  upon  incomes  being  considered  excise  taxes  might  be 
'-levied  under  the  rule  of  uniformity  and  might  be  measured  by  the 
income  accruing  during  the  preceding  year  or  preceding  years. 

J  The  income-tax  act  of  August  5,  1861,  provided  that  the  tax  should 
/be  assessed  ‘‘upon  the  annual  income  for  the  year  preceding  the 
^lst  of  January,  1862, ”  thus  including  the  income  that  had  accrued 
during  the  seven  months  next  preceding  the  passage  of  the  law.  The 
act  of  July  14,  1862,  required  the  tax  to  be  imposed  upon  the  income 
that  had  accrued  during  the  previous  six  and  one-half  months  of  that 
year  prior  to  the  date  of  the  passage  of  the  act. 


3 


4 


THE  INCOME  TAX. 


•  The  English  act  of  June  28,  1853,  likewise  applied  to  all  income 
accruing  from  the  5th  day  of  the  preceding  April. 

In  the  case  of  Stockdale  v.  Insurance  Co.  (20  Wal.,  331)  the  Supreme 
Court  said: 

The  right  of  Congress  to  have  imposed  this  tax  by  a  new  statute,  although  the 
measure  of  it  was  governed  by  the  income  of  the  past  years,  can  not  be  doubted;  much 
less  can  it  be  doubted  that  it  could  impose  such  a  tax  on  the  income  of  the  current  year, 
though  part  of  that  year  had  elapsed  when  the  statute  was  passed.  The  joint  resolution 
of  July  4,  1864,  imposed  a  tax  of  5  per  cent  on  all  income  of  the  preceding  year, 
although  one  tax  on  it  had  already  been  paid;  and  no  one  doubted  the  validity  of  the 
act  or  attempted  to  resist  it. 

The  soundness  of  this  language  was  later  sustained  in  the  case  of 
Patton  v.  Brady  (104  U.  S.,  608). 

In  the  case  of  Maine  v.  Grand  Trunk  By.  (142  U.  S.,  217-229)  the 
Supreme  Court  suggested  that  income  for  one  year  might  properly  be 
taken  for  the  measure  of  all  future  years. 

Again — 

unless  the  Constitution  prohibits  retrospective  legislation,  the  basis  of  the  assessment 
of  taxes  may  as  lawfully  be  retrospective  as  the  reverse;  that  is  to  say,  it  may  as  well 
have  regard  to  benefits  theretofore  received  as  to  those  that  may  be  assessed  thereafter. 
(Cooley  on  Taxation,  3d  Ed.,  492.) 

Betrospective  legislation  is  not  prohibited. 

In  Drexel  &  Co.  v.  Commonwealth  (46  Pa.  St.,  31,  at  p.  40)  the 
Supreme  Court  said: 

It  is  clearly  constitutional  as  well  as  expedient  in  levying  a  tax  upon  profits  or 
income  to  take  as  a  measure  of  taxation  the  profits  or  income  of  the  preceding  year. 
To  tax  is  legal,  and  to  assume  as  a  standard  the  transactions  immediately  prior  is  cer¬ 
tainly  not  unreasonable. 

Additional  authorities  might  be  cited  to  the  same  effect.  As  stated, 
these  authorities  only  had  in  mind  the  imposition  of  an  income  tax 
as  an  excise  or  indirect  tax  by  the  rule  of  uniformity,  whereas  it  should 
be  borne  in  mind  that  under  the  Pollock  decision  incomes  from  rent  of 
real  estate  and  invested  personalty  are  direct  taxes,  and  until  the 
ratification  of  the  recent  amendment  could  only  be  levied  by  appor¬ 
tionment.  The  recent  amendment,  however,  provided  that  Congress 
might  impose  a  tax  on  incomes  without  apportionment,  whether  con¬ 
sidered  as  direct  or  indirect  taxes.  It  is  evident,  therefore,  that  in  so 
doing  the  rule  of  uniformity  must  govern.  The  question  then  arises 
as  to  whether  Congress  may  thus  impose  a  tax  upon  all  incomes  from 
whatever  source  derived,  whether  considered  direct  or  indirect  taxes, 
in  the  same  manner  in  all  essential  respects  that  it  had,  previous  to 
the  Pollock  decision,  imposed  the  tax  upon  incomes  as  an  excise  and 
under  the  rule  of  uniformity.  If  so,  it  necessarily  follows  that  the  tax 
may  be  measured  by  all  income  accruing  from  and  after  the  ratifica¬ 
tion  of  the  constitutional  amendment. 

Does  not  the  very  nature  and  purpose  of  a  tax  on  incomes  accord 
with  the  foregoing  view?  In  the  broad  and  usual  sense  of  tax  Jaws 
the  Government,  for  example,  might  impose  a  tax  upon  property 
according  to  its  value  by  a  direct  and  specific  levy  upon  the  property 
itself,  and  in  concrete  form,  either  real  or  personal ;  this  would  be  done 
by  apportionment;  or  if  it  was  sought  to  impose  a  capitation  tax, 
which  is  one  upon  the  person  solely,  without  any  reference  to  his  prop¬ 
erty,  real  or  personal,  this  would  be  effected  by  apportionment,  while, 


THE  INCOME  TAX. 


5 


upon  the  other  hand,  a  tax  laid  upon  any  business,  or  franchise,  or 
employment,  or  income  would  fall  under  the  rule  of  uniformity. 

The  Pollock  decision  hekl  the  income  tax  invalid  not  on  the  ground 
that  income  could  become  capital  and  escape  the  tax,  but  on  account 
of  its  origin;  that  it  was,  in  effect,  a  tax  on  realty  and  personalty. 
The  only  proper  inquiry  in  the  light  of  the  recent  amendment,  there¬ 
fore,  is  not  as  to  the  origin  or  disposition  of  the  income  in  question, 
but  what  amount  of  income  accrued  to  a  taxable  individual  during  a 
given  period.  It  must  follow  that  the  account  of  annual  income 
required  of  a  citizen  is  for  the  purpose  solely  of  ascertaining  what 
amount  of  tax  ought  to  be  imposed  upon  him  in  consequence  of  his 
having  made  profits  and  collected  by  the  Government  not  necessarily 
out  of  the  specific  income  in  question  but  from  the  general  property 
of  the  taxpayer  as  well.  (61  North  Carolina,  87.) 

This  view  refutes  the  theory  both  that  income  may  become  prin¬ 
cipal,  and  thereby  escape  taxation,  and  also  the  objection  as  to  retro¬ 
spective  legislation. 

In  the  language  of  the  Supreme  Court  (8  Wal.,  234): 

The  tax  is  payable  by  the  person  because  of  his  income,  according  to  its  amount  and 
without  reference  to  the  way  in  which  it  was  obtained. 

The  proposed  measure  would  require  no  act  of  the  citizen  until  the 
1st  of  January  next.  It  would  assess  and  collect  a  tax  off  the  indi¬ 
vidual  during  next  year.  Until  the  1st  day  of  January  the  citizen 
could  not  balance  off  against  his  gross  profits  his  losses,  expenses,  etc., 
and  ascertain  his  net  income  for  the  preceding  year.  Until  the  close 
of  the  year  the  citizen  could  not  know  whether  his  income  would  be 
absorbed  by  losses,  expenses,  etc.,  or  otherwise  disposed  of  without 
even  being  received,  nor  in  fact  could  he  know  whether  he  would  have 
any  net  income  until  he  had  balanced  his  receipts  and  expenditures- 
after  the  end  of  the  year.  Within  the  meaning  of  the  proposed  tax 
the  cumulating  items  of  profit  must  necessarily  remain  in  abeyance 
until  the  expenditures  for  the  year  are  deducted  therefrom  at  the  end 
of  the  year  before  it  could  be  known  whether  there  was  any  sum 
remaining  that  would  or  could  become  capital. 

The  framers  of  the  Constitution  prescribed  two  great  classes  of 
taxes.  The  sole  practical  basis  for  this  division  related  to  the  method 
of  their  imposition,  viz,  those  that  were  to  be  apportioned  were 
called  direct  taxes,  while  those  to  be  levied  by  the  rule  of  uniformity 
were  called  indirect  taxes.  No  court  has  ever  inquired  whether  a 
tax  is  direct  or  indirect  except  for  the  purpose  of  determining  whether 
it  shall  be  levied  under  the  one  or  the  other  rule  just  stated.  Income 
from  real  estate  and  invested  personalty  is  now  as  fully  exposed  to 
the  taxing  power  of  the  Government  under  the  rule  of  uniformity  as 
is  income  from  trades,  professions,  etc.  The  inquiry  is  not  whether 
profits  from  any  source  are  property,  but  are  they  income.  If  so, 
they  are  taxable. 

The  Pollock  decision  held  that  as  to  certain  classes  such  profits 
were  property  and  not  income;  but  the  recent  amendment,  in  its 
necessary  effect,  revoked  this  doctrine  and  said  they  shall  be  treated 
as  any  other  kind  of  income  for  the  purpose  of  an  income  tax. 

Under  the  proposed  measure  income  is  both  the  subject  and  the 
measurement  of  the  tax.  The  recent  amendment  gives  Congress  the 


6 


THE  INCOME  TAX. 


power  to  tax  all  classes  of  income  without  apportionment.  Cer¬ 
tainly,  then,  Congress  may  measure  the  tax  by  the  same  income. 
The  Supreme  Court  has  held  that  where  the  power  to  lay  a  tax  exists 
it  may  be  measured  by  the  income  from  property  not  in  itself  taxable . 
(Flint  v.  Stone  Tracy  Co.,  220  U.  S.,  107;  U.  S.  Express  Co.  v.  Minn., 
223  U.  S.,  335.)  . 

The  constitutional  amendment  simply  exempts  the  entire  tax  to 
which  it  relates  from  the  rule  of  apportionment.  It  then  becomes 
utterly  immaterial  to  inquire  whether  the  tax  is  direct  or  indirect  or 
as  to  the  origin  or  source  of  the  income  or  its  disposition — the  only 
inquiry  pertinent  and  necessary  is,  What  amount  of  net  income 
accrued  to  an  individual  during  a  given  taxing  period  ?  The  tax  is 
thereupon  measured  by  the  same  and  collected  out  of  his  general 
property. 

From  any  viewpoint  it  must  be  agreed  that  Congress  would  impose 
a  tax  with  respect  to  the  annual  net  income  of  the  citizen,  and  the  tax 
to  be  measured  by  such  income,  whether  the  same  or  parts  thereof  be 
considered  property  or  otherwise.  Had  the  recent  amendment  been  a 
part  of  the  Constitution  when  the  Pollock  case  was  decided  there  is  no 
reason  to  suppose  that  even  for  the  purpose  of  income  taxation  any 
class  of  income  would  have  been  held  to  be  property  in  the  taxing  sense 
whatever  its  character  or  nature  may  have  been  considered  in  other 
senses.  Before  the  recent  amendment  the  direct  tax  was  considered 
a  tax  in  terms  on  property,  real  or  personal,  whereas  all  other  taxes 
related  to  businesses,  privileges,  franchises,  etc.,  though  measured  by 
different  methods. 

These  latter  taxes  are  taken  from  the  general  property  of  the 
citizen,  just  as  the  former,  though  not  imposed  in  terms  thereon. 
The  recent  amendment  simply  transferred  certain  categories  of 
income  from  one  of  the  great  clases  of  taxes  to  the  other,  to  all  intents 
and  purposes  if  not  in  name.  This  transfer  makes  all  incomes  con¬ 
form  to  the  tax-meaning  definition  of  the  same  as  prescribed  by  all 
the  courts,  text  writers,  commentators  on  the  Constitution,  and  acts 
of  Congress  prior  to  the  Pollock  decision. 

Income  has  been  defined  as  “the  gain  which  proceeds  from  labor, 
business,  or  property  of  any  kind ;  the  profits  of  commerce  or  business.” 
(44  Pa.  St.,  347;  42  L.  A.,  428;  28  L.  R.  A.,  48.) 

Also  an  income  tax  is  defined  as  “a  tax  which  relates  to  the  product 
or  income  from  property  or  from  business  pursuits.”  (60  Ga.,  93; 
30  S.  W.,  973.) 

It  is  a  tax  upon  a  person  in  respect  of  his  income  imposed  in  con¬ 
sideration  of  the  amount  of  his  net  profits. 

A  tax  on  the  yearly  profits  arising  from  property ,  professions,  trades,  and  offices. 
(Black’s  Law  Dictionary.) 

One  which  relates  to  the  product  or  income  from  property  or  business  pursuits. 
(97  Ky.,  394;  30  S.  W.,  973.) 

Under  the  general  property  laws  of  the  States  the  taxable  status 
of  property,  real  and  personal,  relates  to  the  date  fixed  by  law  for 
its  assessment.  The  assessment,  when  later  made,  must  fix  its  value 
as  of  this  date.  This  may  be  any  day  during  a  taxable  year.  (141 
Ind.,  159;  109  Fed.,  726.) 

An  income  tax  is  assessed  and  collected  during  the  year  subsequent 
to  the  accrual  of  the  income  returned  and  by  which  the  tax  is  meas- 


THE  INCOME  TAX. 


7 


ured.  Under  a  tax  imposed  with  respect  to  net  incomes  the  citizen 
may  be  required  to  return  for  the  purpose  of  the  measurement  of  the 
tax  either  his  income  for  the  preceding  year,  or  his  average  income 
for  a  designated  number  of  preceding  years,  or  his  estimated  income 
for  the  current  year.  This  view  is  sustained  by  previous  citations 
herein. 

It  therefore  follows  that  Congress  at  least  during  any  period  of 
the  present  year  may  impose  and  collect  a  tax  on  all  incomes  accruing 
subsequent  to  the  promulgation  of  the  recent  constitutional  amend¬ 
ment,  and  it  is  strongly  probable  that  the  constitutional  amendment 
had  the  effect  to  empower  Congress  to  measure  the  tax  by  all  income 
accruing  from  the  1st  day  of  January  last.  The  power  to  impose 
the  tax  has  existed  during  the  entire'  year,  and  there  has  been  no 
impediment  to  its  imposition  under  the  rule  of  uniformity  during 
most  of  the  year,  and  under  the  weight  of  authority  in  the  States, 
together  with  the  construction  placed  upon  the  National  Constitution 
by  the  Supreme  Court  in  the  Legal  Tender  and  other  cases,  no  reason 
appears  why  the  tax  now  proposed  could  and  should  not  be  measured 
by  the  income  accruing  from  the  first  of  the  year. 

Such  latter  provision  would  provide  for  the  doing  of  no  act  prior 
to  December  31  next  wTdch  would  otherwise  have  been  done  by  the 
citizen;  it  would  undo  nothing,  it  would  neither  take  away  nor  impair 
any  vested  right.  (4  Nevada,  313.) 

The  language  of  a  constitutional  amendment  should  be  read  in  connection  with  the 
known  condition  of  affairs  out  of  which  the  occasion  for  its  adoption  may  have  arisen, 
and  then  construed  if  there  be  therein  any  doubtful  expressions,  in  a  way,  so  far  as 
is  reasonably  possible,  to  forward  the  known  purpose  or  object  for  which  the  amend¬ 
ment  was  adopted.  (Maxwell  v.  Dow,  176  U.  S.,  581.) 


Department  of  Justice, 

Office  of  the  Attorney  General, 

Washington,  D.  C.,  Auqust  6,  1913. 

Hon.  F.  M.  Simmons, 

United  States  Senate. 

My  Dear  Senator:  Replying  to  your  letter  of  July  30,  in  which 
you  inclose  an  amendment  offered  by  Senator  Root  to  the  income 
section  of  House  bill  3321,  together  with  his  remarks  at  the  time 
of  its  introduction,  and  asking  for  my  views  with  reference  to  the 
Senator’s  contention,  permit  me  to  say: 

I  am  sending  you  two  separate  memorandums,  one  which  Con¬ 
gressman  Hull  very  kindly  prepared  upon  my  request,  and  the  other 
prepared  by  one  of  the  assistants  in  the  department.  I  hope  they 
will  answer  your  demands. 

It  seems  to  me  that  the  Senator’s  proposition  is  not  well  founded. 
The  practice  in  the  past,  the  necessity  for  moving  along  practical 
lines  with  respect  to  tax  matters,  together  with  the  other  suggestions 
contained  in  the  inclosed  memorandums,  are  adequate  to  overthrow 
his  contention. 

With  best  wishes,  faithfully,  yours, 

J.  C.  McReynolds, 

Attorney  General. 


8 


THE  INCOME  TAX. 


Re  Mr.  Root’s  Proposal  to  Amend  Income-Tax  Law. 

[Memorandum  for  the  Attorney  General  by  T.  M.  Gordon,  July  31,  1913.] 

Mr.  Root  suggests  that  the  income-tax  law  must  be  amended  to 
operate  only  from  the  date  of  passage.  His  theory  is  that  income, 
once  accrued,  becomes  principal.  Hence  there  can  be  no  such  thing 
as  an  “ income  tax”  on  past  income.  Such  a  tax  is  a  tax  on  principal, 
a  direct  tax,  still  requiring  apportionment,  despite  the  fifteenth 
^  amendment.  I  do  not  agree  with  Mr.  Root. 

The  whole  question  turns  upon  what  the  words  “  taxes  upon  in¬ 
comes  from  whatever  source  derived”  mean  as  used  in  the  six¬ 
teenth  amendment. 

An  income  tax  is  sui  generis.  It  is  a  legal  fiction,  a  purely  meta¬ 
physical  conception,  very  difficult  to  define  or  classify.  It  seems  to 
me,  however,  that  it  must  be  treated  in  a  practical  sort  of  way,  and 
that  the  definition  which  Mr.  Root’s  argument  assumes  builds  up 
an  unduly  elaborate  legal  fiction,  unwarranted  by  authority  and  very 
unfortunate  in  its  results. 

Of  course  Mr.  Root  can  not  have  in  mind  that  a  tax  to  be  an 
income  tax  must  actually  be  collected,  or  even  assessed,  before 
income  ceases  to  be  income.  Such  a  requirement  would  be  wholly 
impossible  to  comply  with.  For  example,  such  a  requirement  would 
render  it  improper  to  assess  the  tax  upon  income  for  the  preceding 
year,  as  is  done  by  this  law,  and  as  is  the  universal  custom  of  income- 
tax  laws  both  in  this  country  and  in  England. 

Apparently  Mr.  Root  does  assume,  however,  that  a  tax  can  not  be 
a  “ tax  upon  income ”  unless  the  law  levying  the  tax  is  in  active  oper¬ 
ation  at  the  precise  instant  that  the  income  accrues,  so  that  it  may 
then  seize  upon  the  income  constructively ;  i.  e.,  in  legal  fiction.  The 
law  is  conceived  as  a  sort  of  invisible  net  interposed  between  the  indi¬ 
vidual  and  his  source  of  income.  The  Federal  1  per  cent  is  caught, 
branded,  and  turned  loose  again,  as  it  were,  to  be  counted  and  collected 
at  a  later  day  by  the  assessor.  Of  course  physical  analogies  can  not 
express  precisely  how  the  legal  fiction  solves  such  difficulties  as  the 
fact  that  any  individual’s  yearly  income  can  not  be  known  till  the  end 
of  the  year,  or  the  situation  of  the  merchant  who  may  gain  in  one 
transaction  and  lose  in  the  next;  nevertheless  it  must  be  admitted 
that  such  a  conception  of  a  tax  on  income,  though  very  refined  and 
metaphysical,  is  intellectually  possible. 

I  ao  not  think,  however,  that  usage,  as  evidenced  by  prior  laws 
upon  the  subject  and  by  judicial  decisions,  has  ever  restricted  the 
meaning  of  the  words  to  tax  laws  which  might  be  conceived  to  oper¬ 
ate  in  such  a  fashion. 

I.  First,  as  to  the  word  “income,”  I  do  not  think  that  word  neces¬ 
sarily  implies  a  specific  fund  from  which  the  tax  must  be  taken.  A 
man  who  possessed  no  vested  right  to  anything  might  properly  say, 
<£My  present  income  is  $5,000  a  year.”  If  that  is  his  “present  in¬ 
come ,”  why  may  he  not  be  taxed  upon  it? 

II.  That  leads  to  the  significance  of  the  word  “upon.”  This  word  is 
used  in  such  a  wide  variety  of  ways  that  it  is  very  difficult  to  define 
exactly  what  we  do  mean  when  we  say  a  tax  “upon”  anything 
Taxes,  generally  speaking,  are  really  contributions  from  persons,  who 
are  classified  for  tax  purposes  with  reference  to  various  character- 


THE  INCOME  TAX. 


9 


istics,  as  ownership  of  land,  carrying  on  a  certain  kind  of  business,  etc. 
The  factor  or  factors  with  reference  to  which  individuals  are  classified 
is  usually  said  to  be  the  thing  “upon”  which  the  tax  is  levied.  {24 
Harvard  Law  Review,  pp.  41-42.)  Thus  Mr.  Kennan,  in  his  recent 
book  on  Income  Taxation,  defines  an  income  tax  as  “a  tax  the  amount  of 
which  is  determined  with  reference  to  the  income  of  the  taxpayer ”' 
(p.  9).  In  other  words,  “upon”  usually  means  “with  reference  to,” 
or  “based  upon,”  or  “measured  by.”  And  an  income  tax  is  a  tax 
based  upon  income  or  measured  by  income,  not  carved  out  of  a 
specific  fund  of  income. 

In  this  sense  a  tax  can  be  “upon”  a  thing  which  a  person  no 
longer  owns  or  a  state  of  things  which  has  now  ceased  to  exist.  As 
Mr.  Cooley  says  (Cooley,  Taxation  (3d  Ed.),  pp.  492,  493,  494): 

Unless  the  Constitution  prohibits  retrospective  legislation  the  basis  of  an  assess¬ 
ment  of  tases  may  as  lawfully  be  retrospective  as  the  reverse;  that  is  to  say,  it  may 
as  well  have  regard  to  benefits  theretofore  received  as  to  those  wdiich  may  be  assessed 
thereafter.  (Locke  v.  New  Orleans,  4  Wall.,  172,  p.  492.) 

*  *  *  yor  jn  apportioning  the  tax  between  individuals  is  there  any  valid  objec¬ 
tion  to  making  it  on  consideration  of  a  state  of  things  that  may  now  have  come  to 
an  end;  as  where  a  tax  is  imposed  on  the  extent  of  one's  business  for  the  preceding  year 
instead  of  upon  an  estimate  of  the  business  for  the  year  to  come.  Drexell  v.  Common¬ 
wealth,  46  Pa.  St.,  31.  (People  v.  Gold  Co.,  92  N.  Y.,  383.)  *  *  *  One  may 
be  taxed  upon  property  which  he  has  long  ceased  to  own  when  the  tax  is  levied  (pp 
493-494). 

Locke  v.  New  Orleans  (4  Wall.,  172),  cited  supra,  held  a  State 
statute  imposing  an  additional  tax  on  property  according  to  the 
assessment  for  the  previous  year,  and  also  according  to  the  assess¬ 
ment  for  the  year  before  that,  but  not  exceeding  the  tax  already 
imposed  according  to  those  assessments,  was  constitutional. 

Drexell  v.  Commonwealth  (46  Pa.  St.,  31),  also  relied  on  by  Mr. 
Cooley,  related  to  an  income  tax.  The  court  said  (p.  40): 

This  act  clearly  intended  to  levy  a  tax  of  3  per  cent  on  the  profits  or  income  of  the 
business,  and  was  not  meant  to  tax  capital.  Profits  must  necessarily  be  the  net  profits 
of  the  business,  and  the  Commonwealth  was  to  receive  of  them  3  per  cent.  It  was 
in  fact  a  tax  upon  the  income  of  the  business  in  which  the  defendants  were  engaged. 
The  English  income  tax  and  the  United  States  income  tax  are  based  upon  the  in¬ 
comes  received  in  preceding  years.  The  present  United  States  income  tax  is  laid 
upon  the  income  of  1862,  and  the  act  of  Congress  of  the  5th  of  August,  1861  (12  Stat. 
L.,  309),  expressly  declares  that  “the  tax  herein  provided  shall  be  assessed  upon 
the  annual  income  of  the  persons  hereinafter  named,  for  the  year  next  preceding  the 
1st  of  January,  1862,  and  the  said  taxes,  when  so  assessed  and  made  public,  shall 
become  a  lien  upon  the  property  or  other  sources  of  said  income  for  the  amount  of 
the  same,  with  the  interest  and  other  expenses  of  collection  until  paid. 

It  is  clearly  therefore  perfectly  constitutional  as  well  as  expedient,  in  levying  a 
tax  upon  profits  or  income,  to  take  as  the  measure  of  taxation  the  profits  or  income  of 
a  preceding  year.  To  tax  is  legal,  and  to  assume  as  a  standard  the  transactions  imme¬ 
diately  prior  is  certainly  not  unreasonable,  particularly  when  we  find  it  always 
adopted  in  exactly  similar  cases.  The  tax  is  graduated  upon  each  individual  upon 
his  individual  receipts. 

In  People  v.  Gold  Co.  (92  N.  Y.,  383)  a  tax  upon  the  franchises  of 
corporations,  based  upon  dividends  for  the  year  preceding  the  passage 
of  the  law,  was  upheld. 

The  fact  that  the  amount  of  the  tax  may  in  some  cases  be  fixed  by  reference  to  the 
business  of  the  company  during  the  year  does  not  make  the  act  retrospective.  The 
burden  it  imposes  is  future  and  for  future  expenditures.  It  is  competent  for  the  legis¬ 
lature  to  adopt  such  method  of  valuing  the  franchises  or  property  of  corporations  for  the 
purpose  of  taxation  as  it  deems  proper  (pp.  390-391). 


10 


THE  INCOME  TAX. 


In  Glasgow  v.  Rouse  (43  Mo.,  479)  an  additional  tax  on  incomes, 
levied  according  to  the  assessment  of  the  preceding  year,  was  upheld. 
The  court  declared  this  to  be — 

in  entire  harmony  with  the  then  existing  revenue  law.  which  provided  that  the  taxes 
collected  for  any  year  should  be  based  on  an  assessment  made  for  the  previous  year 
(p.  488). 

III.  As  appears  from  the  cases  supra,  the  courts  do  not  go  through 
an  elaborate  fiction  to  prove  that  the  income  is  still  income  at  the 
time  the  tax  attaches.  An  income  tax  is  still  an  income  tax,  whether 
it  is  levied  on  this  year’s  income  or  last  year’s  income  or  (as  has  actu¬ 
ally  been  done  in  the  case  of  professional  incomes  by  the  English 
income-tax  statutes  since  earliest  times)  on  the  average  income  for  a 
period  of  years. 

Furthermore,  every  one  of  the  earlier  Federal  income-tax  statutes 
and  every  one  of  the  English  statutes  that  I  have  examined  not  only 
based  each  year’s  tax  upon  the  income  for  the  preceding  year,  but 
also  based  the  tax  for  the  first  year  upon  income  which  had  already 
accrued  before  the  passage  of  the  act.  It  is  only  fair  to  assume  that  the 
kind  of  income  tax  to  which  the  16th  amendment  refers  is  the  kind 
of  income  tax  which  had  been  called  an  income  tax  in  Federal  stat¬ 
utes,  and  levied  and  collected  many  times  theretofore. 

The  Federal  income  tax  laws  are  as  follows: 

Act  of  August  5,  1861  (12  Stat.,  292) : 

The  tax  herein  provided  shall  be  assessed  upon  the  annual  income  of  the  persons 
hereinafter  named  for  the  year  next  preceding  the  time  for  assessing  said  tax,  to  wit, 
the  year  next  preceding  the  first  of  January,  eighteen  hundred  and  sixty-tivo.  (12  Stat., 
809,  §49.) 

Act  of  July  1,  1862  (12  Stat.,  473,  474): 

*  *  *  The  duty  herein  provided  for  shall  be  assessed  and  collected  upon  the 
income  for  the  year  ending  the  31st  day  of  December  next  preceding  the  time  for  levying 
and  collecting  such  duty;  that  is  to  say,  on  the  first  day  of  May,  1863,  and  in  each  year 
thereafter. 

Act  of  June  30,  1864  (13  Stat.,  223,  281,  283) : 

And  the  duty  herein  provided  for  shall  be  assessed,  collected,  and  psid  upon  the 
gains,  profits,  or  income  for  the  year  ending  the  31st  day  of  December  next  preceding 
the  time  for  levying,  collecting,  and  paying  such  duty  (p.  281,  §  116).  *  *  * 

shall  be  levied  on  the  first  day  of  May  (p.  283,  §  116). 

Act  of  July  4,  1864  (13  Stat.,  417) : 

*  *  *  There  shall  be  levied,  assessed,  and  collected  on  the  first  day  of  October, 
1864,  a  special  income  duty  upon  the  gains,  profit^  or  income  for  the  year  ending  the 
31st  day  of  December  next  preceding  the  time  herein  named. 

Act  of  March  2,  1867  (14  Stat.,  471,  478,  480): 

And  the  tax  herein  provided  for  shall  be  assessed,  collected,  and  paid  upon  the 
gains,  profits,  and  income  for  the  year  ending  the  31st  day  of  December  next  pre¬ 
ceding  the  time  for  levying,  collecting,  and  paying  the  tax  (p.  478). 

Provided,  That  the  tax  on  incomes  for  the  year  1866  shall  be  levied  on  the  day  this  takes 
effect  (p.  480). 

Act  of  July  14,  1870  (16  Stat.,  256) : 

*  *  *  the  tax  hereinbefore  provided  shall  be  assessed  upon  the  gains,  profits, 
and  income  for  the  year  ending  on  the  31st  day  of  December  next  preceding  the  time 
for  levying  and  collecting  said  tax,  and  shall  be  levied  on  the  1st  day  of  March,  1871 . 

Act  of  August  27,  1894  (28  Stat.,  553,  s.  27): 

Tax  to  be  levied  January  1st,  1895,  on  income  for  the  year  ending  December  31st 
next  preceding  time  of  levy  (s.  1  and  s.  30). 


THE  INCOME  TAX. 


11 


English  income-tax  laws  are  as  follows : 

Act  June  22,  1842  (5  and  6  Yict.,  c.  35):  Taxed  income  from  April 
5,  1842. 

Act  June  28,  1S53  (16  and  17  Yict.,  c.  34) :  Taxed  income  from  April 
5,  1853. 

Since  1860  the  English  tax  has  been  reenacted  annually  (16  Ilals- 
bury’s  Laws  of  England,  609).  The  act  of  April  29,  1910  (10  Ed¬ 
ward  YII  and  1  Geo.  V,  c.  8,  s.  65),  is  an  example,  which  provides: 

(1)  Income  tax  for  the  year  beginning  on  the  6th  day  of  April,  1909,  shall  be  charged 
at  the  rate  of  Is.  2d. 

(2)  All  such  enactments  as  were  in  force  on  the  5th  day  of  April,  1909,  shall,  s-  b- 
ject  to  the  provisions  of  this  act,  have  full  force  and  effect  with  respect  to  any  duties 
of  income  tax  hereby  granted. 

IY.  The  economic  conception  of  an  income  tax  is  against  Mr.  Boot’s 
interpretation. 

From  the  economist’s  point  of  view  the  income  tax  is  a  contribu¬ 
tion  by  each  individual,  based  upon  his  ability  to  pay ,  measured  by 
his  income.  A  man’s  income  for  the  preceding  year  is  the  most 
natural  measure  of  his  ability.  And,  as  we  have  seen  above,  all 
previous  income-tax  measures  have  been  levied  on  that  basis. 

Nor  would  it  make  the  tax  a  11  capitation”  tax  to  consider  it  in 
this  way.  “ Capitation”  taxes,  in  the  constitutional  sense,  are  poll 
taxes,  levied  upon  all  men  equally,  without  regard  to  wealth  or  ex¬ 
trinsic  circumstances.  (Cooley,  Taxation  (3d  Ed.),  p.  28;  Hylton  v. 
U.  S.,  3  Dali.,  171;  Springer  v.  U.  S.,  102  U.  S.,  586;  Head  Money 
cases,  IS  Fed.,  135,  139;  Glasgow  v.  Rouse,  43  Mo.,  480.) 

It  is  true  that  in  Pollock  v.  Farmers’  Loan  &  Trust  Co.  (158  U.  S., 
601)  the  court  stated  the  economic  theory  and  expressly  refused  to 
follow  it  to  its  logical  conclusion  in  the  case  of  income  from  property, 
insisting  upon  the  necessity  of  considering  also  the  source  whence  the 
income  was  derived.  (See  p.  629.)  But  that  holding  does  not  help 
Mr.  Root’s  contention.  The  holding  was  that  a  ta:?  upon  the  in¬ 
come  of  property  is  a  tax  upon  the  property  itself,  not  because  the 
income  is  property,  but  because  the  tax  reaches  back  through  the  in¬ 
come  to  the  source  from  which  it  springs.  (Knowlton  v.  Moore,  178 
U.  S.,  41,  82.)  Therefore  the  sixteenth  amendment,  which  was  passed 
with  the  express  purpose  of  escaping  that  decision,  must  be  held  to 
give  power  to  levy  a  direct  tax  on  property,  at  least  that  hind  of  a 
direct  tax  on  property  which  is  measured  by  its  income.  As  was  sug¬ 
gested  above,  if  the  sixteenth  amendment  is  really  designed  to  per¬ 
mit  a  tax  on  property  measured  by  income,  there  is  no  reason  why  in¬ 
come  already  accrued  may  not  be  taken  as  the  standard. 

Y.  The  usefulness  of  the  tax  as  a  war  measure. 

This  was  one  of  the  reasons  most  persistently  urged  for  the  adoption 
of  the  sixteenth  amendment.  Mr.  Root’s  interpretation  would  seri¬ 
ously  impair  its  effectiveness,  however.  How  could  large  amounts  of 
money  be  raised  with  any  degree  of  quickness  if  Congress  must  wait 
a  year  for  income  to  accrued  And  of  course  Mr.  Root’s  objection 
would  apply  to  an  increase  in  the  rate  of  taxation  as  well  as  to  the 
original  imposition  of  a  tax.  That  this  is  a  consideration  of  real 
substance  is  shown  by  the  fact  that  the  income  tax  of  1861,  for 
instance,  was  aimed  at  income  for  the  entire  year  of  1861,  though 
passed  on  August  5  of  that  year.  (12  St  at.,  292.)  And  as  the  war 
proceeded  it  wa&  found  necessary  to  levy  (act  July  4,  1864)  a  special 


12 


THE  INCOME  TAX. 


income  tax  on  income  for  the  whole  year  1863.  (13  Stat.,  417.)  It 

would  be  very  unfortunate  if  the  sixteenth  amendment  would  not 
permit  such  a  war  measure,  and  for  Congress  to  assent  to  such  a 
construction  by  amending  the  law  at  this  time  would  be  a  con¬ 
temporaneous  legislative  interpretation  of  some  weight  if  the  question 
ever  arose  hereafter. 

Faithfully,  Thurlow  M.  Gordon, 

Special  Assistant  to  the  Attorney  General. 


Opinion  of  Hon.  John  K.  Shields,  Senator  from  Tennessee, 

Furnished  Finance  Committee  at  Request  of  the  Chairman 

of  that  Committee. 

AMENDMENT  OFFERED  BY  MR.  ROOT  TO  H.  R.  3321,  JULY  18,  1913. 

The  section  of  the  bill  imposing  an  income  tax  is  in  these  words : 

A.  Subdivision  1.  That  there  shall  be  levied,  assessed,  collected,  and  paid  annually 
upon  the  entire  net  income  arising  or  accruing  from  all  sources  in  the  preceding 
calendar  year  to  every  citizen  of  the  United  States,  whether  residing  at  home  or 
abroad,  and  to  every  person  residing  in  the  United  States,  though  not  a  citizen  thereof, 
a  tax  of  1  per  centum  per  annum  upon  such  income  except  as  hereinafter  provided ;  and 
a  like  tax  shall  be  assessed,  levied,  collected,  and  paid  annually  upon  the  entire  net 
income  from  all  property  owned  and  of  every  business,  trade,  or  profession  carried  on 
in  the  United  States  by  persons  residing  elsewhere. 

Subdivision  2  merely  provides  for  an  additional  tax  upon  larger 
incomes  in  all  things  as  provided  in  subdivision  1 .  (Sec.  2,  subdivs. 

1  and  2,  p.  165.) 

Thus  it  plainly  appears  that  the  tax  is  imposed  regardless  of 
whether  the  income  or  property  represented  by  it  had  its  source  in 
profits  or  gains  from  real  and  personal  property  or  business,  and 
includes  them  all. 

The  method  provided  for  computing  or  assessing  the  tax  makes  no 
distinction  on  account  of  the  source  of  the  income,  and  is  the  same 
whether  it  arises  from  property  or  business.  That  portion  of  the  bill 
providing  for  this,  after  allowing  certain  deductions,  contains  a  pro¬ 
vision  in  these  words: 

The  said  tax  shall  be  computed  upon  the  remainder  of  said  net  income  of  each 
person  subject  thereto,  accruing  during  each  preceding  calendar  year  ending  Decem¬ 
ber  thirty-first:  Provided ,  however ,  That  for  the  year  ending  December  thirty-first, 
nineteen  hundred  and  thirteen,  said  tax  shall  be  computed  on  the  net  income  accru¬ 
ing  from  March  first  to  December  thirty-first,  nineteen  hundred  and  thirteen,  both 
dates  inclusive,  after  deducting  five-sixths  only  of  the  specific  exemptions  and  deduc¬ 
tions  herein  provided  for.  (Sec.  2,  div.  D,  pp.  172-173.) 

The  amendment  proposed  by  Mr.  Root,  July  18,  1913,  is  as  follows: 

On  page  172  strike  out  the  word  “ March,’ ’  and  on  page  173  all  of  line  1,  and  in  line 

2  the  words  “both  dates  inclusive,”  and  insert  in  lieu  thereof  the  words  “the  passage 
of  this  act.” 

The  object  of  this  proposed  amendment,  or,  at  least,  its  effect  would 
be  to  reduce  the  measure  of  the  tax  imposed  for  the  current  year  to 
incomes  accruing  after  the  passage  of  the  bill. 

The  reasons  advanced  by  Mr.  Root  in  support  of  the  amendment, 
as  stated  by  him  at  the  time  it  was  proposed,  are  as  follows: 

I  have  introduced  a  brief  amendment  to  the  tariff  bill,  which  I  shall  ask  to  have 
referred  to  the  Committee  on  Finance;  but  I  wanted  to  call  the  Senators’  attention 


THE  INCOME  TAX. 


13 


to  the  precise  point  of  the  amendment.  It  is  an  amendment  to  the  provision  that  the 
income  tax  shall  be  computed  on  incomes  accruing  from  March  1,  to  December  31, 
1913. 

I  think  the  provision  will  encounter  very  serious  question.  The  change  I  propose 
is  to  have  the  income  for  the  first  year  computed  from  the  passage  of  the  Act,  rather 
than  from  a  fixed  date — March  1,  1913. 

The  reason  why  1  think  it  would  be  wise  to  make  the  change  is  that  all  direct  taxes 
must  be  apportioned  unless  they  come  within  the  amendment  relating  to  the  income 
tax.  We  can  impose  a  tax  upon  incomes  without  apportioning  it  because  of  the 
amendment,  but  we  can  not  impose  any  other  direct  tax  without  apportionment. 
When  income  is  received  it  immediately  becomes  principal.  The  income  that  was 
received  the  1st  day  of  July  of  the  present  year,  having  been  received,  became  princi¬ 
pal,  and  no  law  hereafter  can  tax  it  without  apportionment,  any  more  than  we  can  tax 
now  the  income  that  was  received  10  years  ago  without  apportionment. 

So  if  the  bill  becomes  a  law  with  the  provision  in  it  that  has  been  reported  from  the 
committee  you  will  find  yourselves  endeavoring  in  one  sentence  to  tax  income  that 
comes  under  the  amendment,  and  to  tax  past  income,  income  received,  reduced  to 
possession,  and  turned  into  principal  before  the  passage  of  the  act,  and  that  you  can 
not  do  without  apportionment. 

It  is  to  avoid  that  difficulty,  which  I  am  sure  is  very  serious,  that  I  propose  the 
amendment  which  I  now  ask  to  have  referred  to  the  Committee  on  Finance.  (Cong. 
Record,  p.  2788.) 

The  argument  advanced  to  support  the  contention  of  the  Senator 
is  predicated  solely  upon  the  assumption  that  profits,  dividends,  and 
other  moneys,  constituting  an  income,  when  received,  immediately 
become  “principal,”  or,  in  other  words,  is  incorporated  into  the  corpus 
of  the  estate  of  the  taxpayer,  and  therefore  not  subject  to  direct 
taxation  without  apportionment.  This  involves  the  further  assump¬ 
tion  that  the  tax  imposed  can  only  be  collected  out  of  the  income  of 
the  taxpayer,  or,  in  other  words,  that  his  general  estate  can  not  be 
subjected  to  its  payment. 

The  question,  whether  or  not  an  income  accrued  immediately  and 
automatically  becomes  principal,  or  a  part  of  the  general  estate  of  the 
owner,  whether  sound  or  unsound  in  economics  or  financial  evolution, 
is  not  in  my  opinion  material  to  the  question  involved. 

But  it  is  unsound.  An  income  is.  defined  to  be : 

That  gain  which  proceeds  from  labor,  business,  property,  or  capital  of  any  kind,  as 
the  produce  of  a  farm,  the  rent  of  houses,  the  proceeds  of  professional  business,  or 
money  or  stock  in  funds,  etc. ;  salary,  especially  the  receipts  of  a  private  person,  or  a 
corporation,  from  property. 

This  is  the  natural  and  obvious  sense  of  the  term,  and  it  is  so  used 
in  the  constitutional  amendment  and  in  this  bill.  The  gain,  profit, 
or  acquisition  constituting  the  income  when  it  accrues  and  is  ascer¬ 
tained  becomes  an  entity  and  property  as  much  as  a  farm,  bonds, 
corporate  stocks,  or  other  property  from  which  it  may  have  had  its 
source.  That  it  may  automatically  immediately  become  incorpo¬ 
rated  into  the  estate  of  the  owner,  or  invested,  thereafter  to  yield  an 
income,  or  is  spent,  given  away,  or  consumed,  does  not  destroy  the 
property  entity  of  the  value  it  had  when  it  accrued.  The  fact  that 
the  property  existed  and  was  owned  by  the  taxpayer  at  one  time  is 
indestructible. 

I  suppose  the  objection  of  the  Senator  goes  only  to  computations 
on  incomes  arising  from  property,  real  and  personal,  and  not  to  those 
on  incomes  from  business. 

The  question  really  presented  for  consideration  is,  whether  the 
provision  of  the  bill  for  the  tax  for  the  current  year  is  retroactive  in  its 
operation,  and  imposes  a  liability  for  taxes  before  the  enactment  of 
the  law,  and  is  for  this  reason  unconstitutional. 


14 


THE  INCOME  TAX. 


The  constitutional  amendment  under  which  this  tax,  in  part,  is 
imposed  without  apportionment  ordains: 

The  Congress  shall  have  power  to  lay  and  collect  taxes  on  incomes  from  whatever 
source  derived,  without  apportionment  among  the  several  States  and  without  regard 
to  any  census  or  enumeration. 

It  is  well  settled  that — 


The  language  of  a  constitutional  amendment  should  be  read  in  connection  with  the 
known  condition  of  affairs  out  of  which  the  occasion  of  its  adoption  may  have  arisen, 
and  then  construed,  if  there  be  therein  any  doubtful  expressions,  in  a  way,  so  far  as 
is  reasonably  possible,  to  forward  the  known  purpose  or  object  for  which  the  amend¬ 
ment  was  adopted.  (Maxwell  v.  Dow,  176  U.  S.,  L.  Ed.,  Book  18,  p.  597.) 

It  is  a  part  of  the  history  of  this  country  that  much  of  the  personal 
property  owned  by  every  one,  and  the  great  accumulations  of  wealth 
in  the  hands  of  the  few,  had  for  years  escaped  taxation.  They  could 
not  be  taxed  direct  without  apportionment,  which  was  not  deemed 
advisable.  The  income  tax  law  of  1894  was  enacted  to  remedy  this 
injustice  and  to  make  this  property  bear  its  just  proportion  of  the 
expenses  of  the  Government. 

The  Supreme  Court  of  the  United  States  held  that  tax,  in  so  far 
as  it  was  imposed  upon  incomes  received  from  real  estate  and  per¬ 
sonal  property,  to  be  a  direct  property  tax  and,  being  levied  without 
apportionment,  unconstitutional.  The  tax  upon  incomes  which 
arose  from  other  sources,  and  upon  which  an  excise  tax  could  be 
imposed,  was  not  held  void  for  that  reason,  but  the  contrary  con¬ 
ceded.  (Pollocks.  Farmers’  Loan  &  Trust  Co.,  158  U.  S.,  618,  630; 
L.  Ed.,  Book  39,  1119,  1123.) 

The  sixteenth  amendment  to  the  Constitution  was  proposed  and 
adopted  to  authorize  Congress  to  impose  a  tax  like  that  of  1894,  after 
which  this  is  modeled,  and  which  is  proposed  to  be  enacted  under  that 
power,  in  so  far  as  it  taxes  incomes  arising  from  real  and  personal 
property.  Congress  already  had  the  power  to  impose  a  tax  without 
apportionment  on  incomes  arising  from  gains,  profits,  or  other  acqui¬ 
sitions  in  business,  ordinarily  called  an  excise  tax.  (Flint  v.  Stone 
Tracy  Co.,  220  U.  S.,  106;  55  L.  Ed.,  398.) 

There  are  two  grounds  upon  which,  in  my  opinion,  the  tax  for  the 
current  year  can  be  sustained. 

First.  The  Congress  has  general  power  to  lay  and  collect  taxes, 
duties,  imposts,  and  excises,  to  pay  the  debts  and  pro  vide  for  the  com¬ 
mon  defense  and  general  welfare  of  the  United  States,  unlimited  save 
that  duties,  imposts,  and  excises  shall  be  uniform  throughout  the 
United  States,  and  no  capitation  or  other  direct  tax  shall  be  laid  unless 
in  proportion  to  the  census  or  enumeration,  directed  to  be  taken 
decennially,  nor  on  articles  exported  from  other  States.  (Constitution, 
Art.  I,  secs.  8  and  9.) 

The  Constitution  contains  no  provision  prohibiting  the  Congress 
from  imposing  a  tax  upon  property  owned  or  business  done  by  the 
taxpayer  previous  to  the  enactment  of  the  law  levying  the  tax.  The 
general  rule  is  that  the  Congress,  within  constitutional  limitations, 
has  absolute  power  to  determine  the  objects  of  taxation  and  the 
method  of  the  assessment  of  the  tax.  (Cooley’s  Con.  Lim.,  737; 
Flint  v.  Stone  Tracy  Co.,  220  U.  S.,  167;  Weston  v.  City  of  Charles¬ 
ton,  2  Pet.,  466.) 

Therefore  if  the  bill  be  construed  to  impose  the  tax  for  the  current 
year  on  account  of  the  ownership  of  incomes  received — property 


THE  INCOME  TAX. 


15 


owned  and  business  done  previous  to  the  enactment  of  the  law — it  is 
within  the  power  of  Congress,  without  constitutional  objection,  and 
valid. 

There  is  no  constitutional  prohibition  of  retroactive  legislation 
which  will  affect  this  tax.  (Black’s  Con.  Law,  753;  Cooley’s  Con. 
Lim.,  529;  Satterlee  v.  Mattheson,  2  Pet.,  380;  Drehman  v.  Stifle 
8  Wall.,  595.) 

If  the  constitutional  amendment  changes  or  authorizes  Congress  to 
change  the  classification  of  a  tax  on  incomes  derived  from  property, 
from  that  of  a  direct  tax  to  that  of  an  excise  tax,  and  the  tax  t  ere 
imposed  is  one  of  the  latter  class,  then  the  provision  for  computing 
incomes  before  the  enactment  of  the  bill  is  clearly  a  mere  method  of 
assessment  and  not  only  allowable,  but  usually  done  in  assessing 
excise  taxes.  The  authorities  authorizing  this  manner  of  assessment 
of  excise  taxes  will  be  hereafter  stated. 

Second.  The  provision  of  the  bill  requiring  incomes  received  by 
the  taxpayer  from  all  sources,  from  March  1,  1913,  to  be  computed 
in  ascertaining  the  tax  to  be  paid  for  the  current  year  is  not  the 
imposition  of  a  retroactive  tax,  but  the  method  of  assessment  of  the 
tax  imposed  for  that  part  of  the  current  year  after  the  enactment  of 
the  law,  consisting  in  part  of  a  property  tax  and  in  part  of  an  excise 
tax,  and  is  valid  and  constitutional. 

It  is  immaterial  what  the  tax  is  called.  The  courts  will  treat  it 
according  to  its  correct  classification  as  ascertained  by  the  legislative 
intent  disclosed  in  the  bill  when  construed  in  the  light  of  its  legisla¬ 
tive  and  judicial  history.  I  am  inclined  to  think  the  tax  imposed 
is  a  property  tax  in  part  and  an  excise  tax  in  part.  It  is  a  property 
tax  so  far  as  imposed  upon  incomes  accruing  to  the  taxpayer  from 
real  and  personal  property,  and  an  excise  tax  so  far  as  laid  upon 
incomes  arising  from  all  other  sources.  I  do  not  think  the  consti¬ 
tutional  amendment  was  intended  to  change  the  classification  of  the 
tax,  but  merely  to  allow  it  to  be  imposed  without  apportionment. 

In  so  far  as  it  is  a  property  tax,  it  is  imposed  upon  the  taxpayer 
as  the  owner  of  so  much  property — that  certain  portion  in  value  of 
his  property  which  he  acquired  as  an  income  from  real  and  personal 
property — during  certain  periods  of  the  current  year,  from  March 
1  to  December  31,  and  thereafter  annually.  The  extent  of  the 
property — the  portion  of  the  estate  of  the  taxpayer  upon  which  he  is 
taxed' — is  thus  measured  by  the  income  received  during  said  periods, 
to  be  ascertained  and  fixed  as  in  the  bill  prescribed.  This,  under  the 
Pollock  cases,  is  a  direct  tax,  but  it  is  now  authorized,  without  appor¬ 
tionment,  by  the  constitutional  amendment  under  which  it  is  proposed 
to  be  enacted. 

It  is  an  excise  tax  so  far  as  it  is  imposed  on  incomes  from  all  other 
sources,  as  has  been  decided  by  the  Supreme  Court  in  many  cases. 

There  seems  to  be  no  valid  objection  to  imposing  the  two  classes  of 
taxes  in  the  same  law.  This  was  done  in  the  act  of  1894  and  not  con¬ 
sidered  objectionable.  The  court  referring  to  it  in  the  Pollock  cases, 
expressly  stated  that  this  point  did  not  affect  its  decision.  (158 
U.  S.,  636;  L.  ed.,1125.) 

The  Congress,  within  constitutional  limitations,  has  plenary  j>ower 
to  select  the  objects  of  taxation  and  the  methods  by  which  the  tax 
imposed  shall  be  levied,  assessed,  and  collected.  It  may,  with 
proper  uniformity,  tax  all  the  property  of  the  taxpayer  or  only  a 


16 


THE  INCOME  TAX. 


portion  or  a  certain  kind  of  it.  It  may  impose  an  excise  tax  on  all 
business,  avocations,  or  on  part  of  them.  It  also  has  almost  unlim¬ 
ited  power  in  providing  for  the  selection  of  the  property  to  be  taxed, 
and  all  necessary  machinery  for  the  assessment  of  the  same  for  tax¬ 
ation  and  for  the  collection  of  the  tax.  These  principles  are  ele¬ 
mentary.  (Cooley’s  Con.  Lim.,  737,  739;  Cooley’s  Taxation,  vol.  1, 
602-604.) 

In  the  case  of  Flint  v.  Stone  Tracy  Co.  (230  U.  S.,  167,  55  L.  Ed., 
420)  it  is  said: 

We  must  not  forget  that  the  right  to  select  the  measure  and  objects  of  taxation 
devolves  upon  the  Congress  and  not  upon  the  courts,  and  such  selections  are  valid 
unless  constitutional  limitations  are  overstepped . 

All  the  authorities  agree  that  the  basis  of  an  assessment  for  tax¬ 
ation  may  be  retrospective.  (Cooley  on  Taxation,  vol.  1,  p.  492.) 

The  same  method,  it  is  true,  is  here  provided  for  assessing  the 
property  tax  and  the  excise  tax  imposed,  but  I  can  see  no  objection 
to  the  bill  on  this  account.  It  is  equally  applicable  to  both  taxes 
and  makes  the  machinery  less  complicated  and  easier  of  operation. 
Direct  taxation  by  reason  of  the  ownership  of  property  and  an 
excise  tax  upon  business  are  merely  different  methods  by  which  the 
same  end  is  reached;  that  is,  by  which  the  taxpayer  is  made  to 
contribute  out  of  his  property  to  the  support  of  the  Government. 

As  before  stated,  the  provision  of  the  bill  requiring  the  computation 
of  incomes  received  by  taxpayers  during  the  periods  mentioned  in  the 
bill  is  merely  the  basis  for  the  assessment  of  the  tax,  and  it  is  well 
settled  that  incomes  received  before  the  law  is  passed  may  be  con¬ 
sidered  in  ascertaining  the  tax  to  be  paid  for  the  first  year. 

The  excise  cases  decided  by  the  Supreme  Court  of  the  United 
States  sustain  these  conclusions.  They  are  directly  in  point  in  so  far 
as  the  property  taxed  arises  from  incomes  from  business  subject  to  an 
excise  tax  and  clearly  analagous  where  the  income  arises  from  real 
and  personal  property,  both  of  which  are  to  be  found  in  this  bill. 

The  court  has  held  in  all  these  cases  that  the  tax  to  be  collected 
may  be  measured  by  the  business  done,  the  profits  made,  the  divi¬ 
dends  accrued,  and  the  gains  made  for  periods  previous  to  the  enact¬ 
ment  of  the  law  imposing  the  tax,  in  some  other  cases  a  part  of  the 
year,  like  the  present  law,  and  in  others  the  year  previous  to  that  in 
which  the  law  was  enacted. 

It  is  also  held  that  where  the  basis  fixed  for  the  assessment  is  a  per¬ 
centage  on  the  capital  stock  or  business  done  by  a  corporation,  and 
that  in  this  way  assets  which  are  exempt  from  taxation  and  business 
not  taxable  are  included  in  making  the  assessment,  the  validity  of 
the  tax  imposed  is  not  affected. 

In  Home  Ins.  Co.  v.  N.  Y.  (134  U.  S.,  594;  33  L.  Ed.,  1025)  the  tax 
in  question  was  imposed  upon  the  privilege  of  the  complainant  to 
do  business  as  a  corporation  within  the  State  and  was  measured  by 
the  extent  of  the  dividends  of  the  corporation  of  the  current  year 
upon  the  capital  stock,  some  two  million  dollars  of  which  were  invested 
in  bonds  of  the  United  States  exempt  from  taxation.  The  tax  was 
attacked  because  this  mode  of  assessing  the  same  included  the  value 
of  exempt  property.  The  court,  in  sustaining  the  tax,  said: 

It  is  not  a  tax  in  terms  upon  the  capital  stock  of  the  company,  nor  upon  any  bonds 
of  the  United  States  composing  a  part  of  the  stock.  The  statute  designates  it  a  tax 
upon  the  “ corporate  franchises  or  business”  of  the  company,  and  reference  is  only 


THE  INCOME  TAX. 


17 


made  to  its  capital  stock  and  dividends  for  the  purpose  of  determining  the  amount  of 
the  tax  to  be  enacted  each  year.  The  validity  of  the  tax  can  in  no  way  be  dependen 

veTwMch' U^exaS^ttT7  i*™  V°  adopt  “  the  Lou“a„ny 

•  wmcn  it  will  exact  for  the  franchise.  No  constitutional  obiection  lips  in  t hi 

vay  of  a  legislative  body  prescribing  any  mode  of  measurement  to  determine  the 
amount  it  will  charge  for  the  privilege  it  bestows.  determine  the 

The  case  of  the  State  of  Maine  v.  Grand  Trunk  Ry.  Co.  involves  an 
excise  tax  levied  by  the  State  upon  railroad  corporations  for  the 
privilege  of  exercising  their  franchise  within  the  State,  the  tax  being 
hxed  by  a  certain  percentage  of  the  transportation  receipts  of  the 
company  including  interstate  and  foreign  commerce,  for  the  previous 
year.  The  tax  was  assailed  upon  the  ground  that  it  was  a  burden 
upon  interstate  commerce  and  the  business  done  in  a  former  year. 

is  sa id°Urt  SUStamed  tile  tax*  In  tlle  opinion,  among  other  things,  it 

•  ^ie  character  of  the  tax  or  its  validity  is  not  to  be  determined  by  the  mode  adopted 

hs  amount  for  any  specific  period  or  the  time  of  its  payment.  The  whole 
field  of  inquiry  into  the  extent  of  revenue  from  sources  at  the  command  of  the  corpora- 

exffecffoffhe  privilege8^  *rat*0ny  **“  ^  “  de““g  may  be°jSy 

And  if  the  inquiry  of  the  State  as  to  the  value  of  the  privilege  were  limited  to  the 
P^-?earf  lnstead  of  the  year  in  which  theHalTs  cXcted  it  is 
bn^Qde<f  that  t]ie  y^bdity  of  the  tax  would  not  be  affected;  and  if  not,  we  do  not  see 
ow  a  leierence  to  the  results  of  any  other  year  could  affect  its  character  There  is  no 
ievy  by  the  statute  on  the  receipts  themselves,  either  in  form  or  fact;  they  constitute 
as  stated  above,  simply  the  means  of  ascertaining  the  value  of  the  privilege  conferred! 

In  Stockdale  v.  Atlantic  Ins.  Co.  (87  U.  S.,  341,  22  L.  Ed.,  350)  an 
excise  tax  assessed  upon  dividends  declared  by  the  company  pre¬ 
viously,  was  held  to  be  valid.  Mr.  Justice  Miller  in  his  opinion  said  : 

The  right  of  Congress  to  have  imposed  this  tax  by  a  new  statute,  although  the  measure 

it  be  doub?JdetW  it7  thm1?C°me  °f  past  yeap  can  not  be  doubted;  much  less  can 
rirt  that  it  could  impose  such  a  tax  on  the  income  of  the  current  year,  though 

Julv  4  18fi4  e^apseA  when  was  passed.  The  joint  resolution  of 

id  t?X  Sf  5  per  c- jnt  upon  a11  mcomes  Of  the  previous  year,  although 

“tempted  to  reStftready  been  ^  and  D°  doubted  th*  "W »f  the  tax  "or 

Flint  «.  Stone  Tracy  Co.  (220  U.  S.,  55  L.  Ed.,  410)-the  Corpora* 
tion  Tax  case— is  the  latest  excise  tax  case.  All  the  cases  where 
excise  taxes  have  been  attacked,  because  in  the  measurement  or 
assessment  of  the  tax  property  nontaxable,  and  profits,  incomes,  and 
business  accruing  previous  to  the  passage  of  the  law,  were  included 
and  valued,  are  reviewed,  and  it  is  there  held  that  the  Government 
may  use  these  methods  m  measuring  or  assessing  the  tax  imposed 
without  affecting  the  validity  of  the  tax.  F 

I  think  the  principle  controlling  all  these  cases  is  the  same  hbr& 
involved,  and  sustains  the  tax  proposed  to  be  imposed. 

There  is  nothing  in  the  amendment  requiring  the  tax  to  be  paid 
or  collected  out  of  the  specific  moneys  constituting  the  income 
accruing  during  said  periods,  and  what  the  taxpayer  does  with  the 
moneys  constituting  his  income  is  immaterial.  It ‘can  not  have  the 
effect  to  relieve  him  of  the  tax  imposed  upon  him  as  the  owner  of 
property  of  its  value.  This  tax,  like  all  other  taxes,  is  a  debt  due 
to  the  Government,  and  collectible  out  of  any  of  the  taxpayer’s 
property  that  may  be  found.  If  the  law  was  otherwise,  the  payment 
and  collection  of  the  tax  would  be  dependent  upon  the  ability  of  the 
S.  Doc.  171,  63-1 - 2 


18 


THE  INCOME  TAX. 


taxpayer  to  dispose  of  his  income  before  the  authorities  could  seize 
it  for  the  payment  of  his  just  contribution  to  the  expenses  of  the 
Government. 

The  statutes  of  a  majority,  if  not  all,  of  the  States  provide  that 
property  shall  be  assessed  against  the  owners  upon  some  certain  day 
of  the  year  and  that  transfers  after  that  shall  not  affect  the  assess¬ 
ment.  The  owner  of  the  property  upon  the  day  of  the  assessment 
is  liable  for  the  tax  thereon  according  to  the  assessment  made,  not¬ 
withstanding  the  general  assembly,  municipal  council,  or  other 
taxing  power  may  levy  the  tax  on  a  subsequent  day  of  the  year. 
The  property  of  the  citizens  taxed  for  that  year  is  here  measured 
by  that  which  they  own  on  the  day  fixed  for  the  assessment,  and  which 
is  made  as  of  that  day.  These  laws  have  never  been  questioned  so 
far  as  I  can  find. 

The  provisions  of  this  bill  upon  this  question  are  not  different 
from  the  income  tax  laws  of  England  and  those  heretofore  enacted 
in  this  country. 

The  English  income  tax  enacted  June  28,  1853,  provided  that  the 
same  should  be  operative  and  effective  from  and  after  April  5,  1852, 
and  of  course  included  incomes  accruing  previous  to  its  enactment. 

The  income  tax  imposed  by  Congress  August  5,  1861,  expressly 
provided  that— 

the  tax  herein  provided  shall  be  assessed  upon  the  annual  incomes  of  the  persons 
hereinafter  named  for  the  year  next  preceding  the  1st  of  January,  1862,  and  the  said 
taxes  when  so  assessed  and  made  public  shall  become  a  lien  upon  the  property  or 
other  sources  of  said  income  for  the  amount  of  the  same,  with  the.  interest  and  other 
expenses  of  collection  until  paid.  (12  Stat.  L.,  309.) 

Here  the  tax  was  imposed  upon  the  incomes  accruing  between 
January  1,  1861,  and  August  5  of  that  year,  the  day  of  the  enactment 
of  the  law. 

The  act  of  July  14,  1862,  superseding  the  one  above  stated,  pro¬ 
vided  for  the  assessment  upon  incomes  received  from  and  after 
January  1  of  that  year,  or  for  a  period  of  six  months  before  the  act 
was  passed. 

The  income  tax  of  1894,  enacted  in  August  of  that  year,  provided 
for  the  taxation  of  incomes  from  the  beginning  oi  the  current  year 
and  was  attacked  upon  this  ground.  The  question  was  not  decided 
in  the  cases  which  reached  the  Supreme  Court  of  the  United  States, 
but  it  was  held  by  the  Supreme  Court  of  the  District  of  Columbia  in 
the  case  of  Moore  v.  Miller,  decided  January  23,  1895,  that  there  was 
nothing  in  the  objection.  In  that  case  Hagner,  J.,  said: 

This  provision  is  of  the  same  character  as  those  appearing  in  the  former  income  acts 
of  the  United  States. 

The  first  act,  passed  on  the  5th  of  August,  1861,  declared  that  from  and  after  the 
1st  of  January,  1862,  there  should  be  levied  an  income  tax,  which  should  be  assessed 
in  the  first  instance  “upon  the  annual  income  for  the  year  preceding  the  1st  of  January, 
1862,”  thus  including  in  return  the  income  that  had  accrued  during  the  seven  months 
next  preceding  the  passage  of  the  law. 

The  act  of  the  14th  of  July,  1862,  which  superseded  the  first  law,  declared  that  the 
tax  should  be  levied  on  the  1st  of  May,  1863,  upon  the  income  of  the  preceding  year 
ending  the  31st  of  December,  1862,  including  thereby  the  six  months  and  a  half  of  the 
year  that  had  expired  at  the  time  the  act  was  passed. 

The  English  act  of  1853,  passed  on  the  28th  of  June,  1853,  declared  that  the  income 
tax  thereby  established  should  be  operative  from  and  after  the  5tli  day  of  the  preced¬ 
ing  April. 


THE  INCOME  TAX.  19 

No  authority  was  quoted  in  support  of  this  contention,  and  I  have  been  unable  to 
discover  any  if  it  exists. 

But  the  very  point  appears  to  have  been  decided  the  other  way  in  20  Wallace,  331 
(Stockdale  y.  Ins.  Co.),  where  Mr.  Justice  Miller  said:  “The  right  of  Congress  to  have 
imposed  this  tax  by  a  new  statute,  although  the  measure  of  it  was  governed  by  the 
income  of  the  past  years,  can  not  be  doubted;  much  less  can  it  be" doubted  that  it 
could  impose  such  a  tax  on  the  income  of  the  current  year,  though  part  of  that  year 
had  elapsed  when  the  statute  was  passed.  The  joint  resolution  of  July  4,  1864, 
imposed  a  tax  of  5  per  cent  on  all  incomes  of  the  previo-  s  year,  although  one  tax  on  it 
had  already  been  paid;  and  no  one  doubted  the  validity  of  the  act  or  attempted  to 
resist  it.” 

In  a  Pennsylvania  case,  in  which  a  tax  in  substance  was  imposed 
upon  incomes,  a  similar  question  was  presented  and  held  not  to 
affect  the  validity  of  the  law: 

This  act  clearly  intended  to  levy  a  tax  of  3  per  cent  on  the  profits  or  income 
of  the  business,  and  was  not  meant  to  tax  capital.  Profits  must  necessarily  be  the 
net  profits  of  the  business,  and  the  Commonwealth  was  to  receive  of  them  3  per  cent. 
It  was  in  fact  a  tax  upon  the  income  of  the  business  in  which  the  defendants  were 
engaged.  The  English  income  tax  and  the  United  States  income  tax  are  based 
upon  the  incomes  received  in  preceding  years.  The  present  United  States  income 
tax  is  laid  upon  the  income  of  1862,  and  the  act  of  Congress  of  the  5th  of  August, 
1861  (12  Stat.  at  Large,  309),  expressly  declares  that  “the  tax  herein  provided  shall 
be  assessed  upon  the  annual  income  of  the  persons  hereinafter  named,  for  the  year 
next  preceding  the  1st  of  January,  1862,  and  the  said  taxes,  when  so  assessed  and 
made  public,  shall  become  a  lien  upon  the  property  or  other  resources  of  said  income 
for  the  amount  of  the  same,  witK  the  interest  and  other  expenses  of  collection  until 
paid.” 

It  is  clearly,  therefore,  perfectly  constitutional,  as  well  as  expedient,  in  levying  a 
tax  upon  profits  or  income,  to  take  as  the  measure  of  taxation  the  profits  or  income 
of  a  preceding  year.  To  tax  is  legal,  and  to  assume  as  a  standard  the  transactions 
immediately  prior  is  certainly  not  unreasonable,  particularly  when  we  find  it  always 
adopted  in  exactly  similar  cases.  The  tax  is  graduated  upon  each  individual  upon 
his  individual  receipts. 

The  Wisconsin  income  tax  law  went  into  effect  July  5,  1911,  but 
provided  for  taxing  all  incomes  received  during  that  year.  The  act 
was  attacked,  among  other  grounds,  upon  the  contention  that  it  was 
retroactive  and  void  under  the  constitution  of  that  State.  The  court 
in  disposing  of  this  question  said: 

One  further  objection  we  overrule  here  without  comment,  for  the  reason  that  it 
seems  very  unsubstantial,  namely,  the  objection  that  the  law  is  retroactive  and  void, 
because  assessed  on  incomes  received  during  the  entire  year  1911,  while  it  did  not 
go  into  effect  until  July  15  of  that  year,  and  also  because  it  includes  profits  derived 
from  the  sale  of  property  purchased  at  any  time  within  three  years  previously.  (In¬ 
come  Tax  cases,  148  Wis.,  456,  514.) 

In  Wisconsin  &  M.  E.  Co.  v.  Powers  (191  U.  S.,  379,  48  L.  Ed.,  229) 
a  statute  was  sustained  which  made  the  income  of  the  railway  com¬ 
pany  within  the  State  including  interstate  earnings  the  prima  facie 
measure  of  the  value  of  the  property  within  the  State  for  the  purpose 
of  taxation.  In  the  course  of  the  opinion  the  court  said: 

In  form  the  tax  is  a  tax  on  ‘the  property  and  business  of  such  railroad  corporation 
operated  within  the  State  ”  computed  upon  certain  percentages  of  gross  income.  The 
prima  facie  measure  of  the  plaintiff’s  gross  income  is  substantially  that  which  was 
approved  in  Maine  v.  Grand  Trunk  R.  Co.  (142  U.  S.,  217,  228). 

The  statute  of  Minnesota,  passed  for  revenue  purposes  in  1905, 
levied  a  property  tax  to  be  computed  upon  the  gross*  receipts  of  cor¬ 
porations  doing  both  domestic  and  interstate  business,  the  last  of 
which,  of  course,  could  not  be  taxed  by  the  State,  as  such  a  tax  would 


20 


THE  INCOME  TAX. 


3  0112  061603863 


be  a  burden  upon  interstate  commerce,  and  in  violation  of  the  com¬ 
merce  clause  of  the  Federal  Constitution.  The  Supreme  Court  of 
the  United  States  sustained  this  statute  and  upheld  the  tax.  In  the 
opinion  delivered  for  the  court  by  Mr.  Justice  Day,  it  is  said: 

Upon  the  whole,  we  think  the  statute  falls  within  that  class  where  there  has  been  an 
exercise  in  good  faith  of  a  legitimate  taxing  power,  the  measure  of  which  taxation  is 
in  part  the  proceeds  of  interstate  commerce,  which  could  not,  in  itself,  be  taxed,  and 
does  not  fall  within  that  class  of  statutes  uniformly  condemned  in  this  court,  which 
show  a  manifest  attempt  to  burden  the  conduct  of  interstate  commerce,  such  power, 
of  course,  being  beyond  the  authority  of  the  State.  (Express  Co.  v.  Minn.,  223  U.  S., 
335.) 

These  two  last  cases  seem  to  be  directly  in  point.  They  involved 
statutes  imposing  property  taxes,  measured  or  assessed  by  methods 
which  involved,  in  part,  the  computation  of  property  and  incomes  not 
within  the  taxing  power  of  the  State.  This  was  but  an  application 
of  the  general  principle  that  the  legislature  has  the  power  to  prescribe 
any  method  of  assessment  of  property  for  taxation  that  may  be  deemed 
wise  and  efficient,  and  illustrates  the  important  distinction  between  the 
subject  of  taxation  and  the  method  of  assessment  of  taxation. 

I  think  the  amendment  without  merit,  and  the  provision  of  the  bill 
called  in  question  constitutional. 

o 


